Beyond borders: Biotechnology report 2017

Staying the course

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It was supposed to be a bad year for biotech. For this sector, the simplest of truisms has always held: what goes up must eventually come down. Markets peaked in 2015 and declined in 2016; payer pressure and US election year rhetoric weighed on the sector; drug approvals fell sharply; and biotech companies faced a dwindling supply of public market capital to fund R&D in key US and European markets.

Moreover, in 2016 the biotech industry in the US and Europe faced — and continues to face — unprecedented strategic and policy uncertainty. But despite these challenges and the peculiar gravitational pull that always follows years of success, biotech largely stayed the course in 2016 and was able to deliver historically strong results across a number of key metrics.

In 2016, overall financing was down, but the early-stage venture ecosystem remained healthy. In fact, biotech enjoyed its third-best financing year ever, despite a drop in proceeds from initial public offerings and follow-on rounds. Dealmaking remained active in 2016 as acquirers took advantage of biotech valuations coming back to Earth.

The industry’s largest players remain on the hunt for pipeline-augmenting assets and commercial growth opportunities. There are still plenty of biotech targets that can boost future prospects, and 2017 has started off strong thanks in large part to Johnson & Johnson’s US$30 billion acquisition of Swiss bellwether Actelion.

The industry’s collective market capitalization did fall in 2016. But so far in 2017 it has enjoyed a bounce in tune with the broader market, and the lure of tax reform and continued consolidation has helped to buoy the sector. Biotech companies poured record amounts of capital into R&D in 2016. Revenue growth for publicly traded US and European companies fell to 7% during 2016 after two years of double-digit growth, but that growth came despite the competitive forces that helped payers push back on prices in key biopharma markets.

EY - Growth in established biotechnology centers

Meanwhile, the industry’s capital investments — and the bets of investors — appear to be increasingly concentrated in specialist markets such as rare diseases and oncology. In particular, both venture investment and the public market bets appear to be focused on immuno-oncology companies. As was pointed out in the annual EY M&A Outlook and Firepower Report, there are more than 20 antibodies targeting a PD-1 and related checkpoint targets in clinical development.

Whether the tremendous amount of capital deployed in immuno-oncology start-ups and by established biopharma companies turns out to be disproportionate to even rosy market predictions remains to be seen.

Regulatory speed bumps

The U.S. Food and Drug Administration (FDA) approved three new biosimilars in 2016, up from two the prior year. Legal details to the regulatory approval process for this new therapy class are still being ironed out in court, with particularly interest in the Amgen v. Sandoz case at the U.S. Supreme Court. However, no matter the outcome, increasing payer pressure in specialty markets creates demand for these molecules.

Approval for new therapies dropped to 22 compared to 2015’s two-decade high of 45. This was mainly the result of a mix of manufacturing-related issues and fewer new drug applications overall. The first quarter of 2017 saw industry numbers rebound to healthier levels, suggesting 2016’s ebb isn’t overly concerning.

Uncertainty, certainly

Brexit is merely one aspect of what many in biotech see as unprecedented policy and regulatory uncertainty in 2017. The possible repeal of the Patient Protection and Affordable Care Act in the US and the possible impacts of tax reform also hang over the future prospects of biotechnology companies.

Support by the Trump Administration for key institutions relied on by the biotech industry, such as the National Institutes of Health, is wavering. Hiring freezes and funding cuts at key federal agencies could raise issues for 21st Century Cures Act implementation. The policy arena could also drive more financing volatility in the short term, impacting both fundraising and dealmaking strategies.

Boosting R&D efficiency in part by embracing emerging technologies including digital and artificial intelligence, in part through use of creative business models, will be necessary for biotechs to simultaneously increase return-on-investment and the affordability of drugs.

 

Meanwhile, for companies with marketed therapies, competitive as well as political forces will reinforce downward pressure on drug prices and the need to demonstrate drug value. High drug prices in the US have allowed companies to avoid reckoning with inefficient R&D operations.

Boosting R&D efficiency in part by embracing emerging technologies including digital and artificial intelligence, in part through use of creative business models, will be necessary for biotechs to simultaneously increase return-on-investment and the affordability of drugs.

EY - Questions for biotech companies

Looking ahead through 2017 and into 2018, the growth of the biotech industry is increasingly global. The emerging venture ecosystem in China comprising strategic as well as financial investors is quickly funding a new generation of home-grown biotech competitors.

These and other forms of competition — from digital technologies to newly unearthed biological pathways or technologies, including cell therapy and gene editing that promise next-wave innovation, to the impact of biosimilars — will further drive biopharma dealmaking. The promise of M&A will eventually boost investors’ outlook on the sector and willingness to finance a new burst of drug discovery and development, even as biotechs adapt to new regulatory and policy realities.

 

To read more on our insights and analysis of the biotech industry, please see our latest report, Biotechnology report 2017: Beyond borders – Staying the course.